The IFRS Interpretations Committee (IFRS IC) received a request about the accounting treatment of sale-and-leaseback transactions with variable payments.
Keywords: Mazars, Thailand, IFRS IC, IFRS, IASB
31 August 2020
The fact pattern described in the submission is as follows:
- an entity (seller-lessee) has entered into a sale-and-leaseback transaction whereby it transfers an item of property, plant and equipment to another entity (buyer-lessor) and leases the asset back for five years;
- this transaction meets the requirements in IFRS 15 to be accounted for as a sale, and the amount paid is the item’s fair value at the date of the transaction;
- the lease payments are at market rates and are variable payments, calculated as a percentage of the revenue generated from use of the underlying asset. The variable payments are not in-substance fixed payments as described in IFRS 16.
In this context, the request asked how the seller-lessee should measure the right-of-use asset arising from the sale-and-leaseback transaction, and how much gain or loss it should thus recognise at the date of the transaction.
The IFRS IC responded to this request by publishing an agenda decision in the June 2020 IFRIC Update.
Drawing on the provisions of paragraph 100 (a) of IFRS 16, the Committee stated that to measure the right-of-use asset arising from the sale-and-leaseback transaction, the seller-lessee shall determine what proportion of the rights have been sold to the buyer-lessor by comparing them with the right of use retained through the lease at the transaction date.
Noting that the standard does not specify a particular method for determining this proportion, the Committee stated that:
- the seller-lessee may determine this proportion by comparing, for example, (a) the present value of expected payments for the lease (including those that are variable), with (b) the fair value of the transferred asset at the date of the transaction;
- the gain or loss recognised by the seller-lessee is a consequence of its measurement of the right-of-use asset, measured as a proportion of the carrying amount of the transferred asset, and the amount of the gain or loss thus relates only to the rights transferred to the buyer-lessor;
- the seller-lessee must also recognise a liability at the date of the transaction (not classified as a lease liability). The initial valuation of this liability is only a consequence of the assessment of the right to use, even if the lease payments are variable and do not depend on an index or rate. The initial measurement of the liability derives directly from how the right-of-use asset is measured.
The Committee provided an illustrative example, which is unusual enough to be noted.
Alongside this agenda decision, the IASB decided at its May meeting, on the recommendation of the IFRS IC, to amend IFRS 16 to specify how a seller-lessee would subsequently measure a liability arising from a sale-and-leaseback transaction. An exposure draft on this topic is scheduled for the third quarter of this year.